Do You Really Need FHA Approval for a Condo?

You want to buy a condo, but only qualify for FHA financing. You start the process only to find out the condo needs FHA approval. What is it? Why is it so important? We discuss the important details below. FHA’s approval of the condo association benefits not only buyers, but sellers too. No matter which side of the transaction you are on, this could apply to you.

Why Does FHA Approve Condos?

Condominiums are known as riskier than single family homes. If you add to that risk the low down payment FHA loans require, it’s risky business for lenders. It’s for this reason that the FHA requires all condos with FHA financing be FHA approved.

The FHA approves condos on a 2-year basis. This means after 2 years, the association must reapply for the certification. This gives the FHA a chance to make sure nothing major has changed within the association. Legal issues, insurance problems, and low occupancy rates can increase the risk lenders take when providing financing on the units.

How Buyers Benefit from Approved Condos

Buyers benefit a lot from the FHA approval. Without it, buyers could not use FHA financing to buy the condo. Since many first-time homebuyers buy a condo and use FHA financing, it’s a necessity for them.

First-time homebuyers often turn to FHA financing because of its flexible guidelines. First, there is the low down payment. Only needing
3.5% of the purchase price is a large benefit for those buying their first home. FHA loans also offer flexible credit and income guidelines. For instance, they accept higher debt ratios and lower credit scores than conventional loans allow.

If a condo association does not secure FHA approval, it takes that development out of the realm of possibilities for homebuyers.

How Sellers Benefit from Approved Condos

Sellers also benefit from FHA approved condos, though. Without the approval, the market sellers have to sell their home to dwindles. Since condos are often a first-time homebuyer’s choice, it could really limit who they can sell to.

In some cases, not having FHA approval can even decrease the value of the property. This could be because of the smaller pool of buyers the development can bring. With less interest, there may be less turnover forcing sellers to lower their price just to bring in some interest.

What Does the FHA Require?

So now, we must look at what the FHA requires for condo approval:

Any commercial space in the development can’t exceed 50%

No more than 15% of the owners can be behind on their assessments

At least 50% of the units must be owner occupied

One owner may not own more than 50% of the units

The development must have adequate reserves to cover all costs

The development must carry proper insurance

These are the basic requirements. The condo association must provide all documentation to the FHA for approval. These items include:

Proof of all income and expenditures

Minutes from the latest board meetings

Proof of insurance

Copy of the bylaws

The FHA will then go over the documents to make sure the development meets or exceeds the FHA requirements.

What Happens if the Condo Isn’t FHA Approved?

As a buyer, you only have one option if the condo isn’t FHA approved. You have to find a different type of financing. Usually, this means conventional financing. All other government programs usually rely on the FHA’s approval of the development.

If you have to opt for other financing options, it could mean higher down payments and stricter guidelines. This could put some buyers in a difficult situation.

Your only other option is to shop around for a different condo. This time, you could
search for only condos that have FHA approval already.

As a seller, you are in a difficult situation without FHA approval. Your audience is very limited as no one with government financing can buy your property. It is to your advantage to work with the HOA to get them on board with an FHA approval.

In short, the FHA approval is very important for both the buyer and the seller. Without it, the community could really suffer. Buyers with FHA financing will be forced to go elsewhere, leaving sellers hanging onto their condos for longer periods of time. Approved FHA condos benefit the entire community. Even if there is only one FHA buyer at the moment, there will be more down the road.

It pays to find a development that works closely with the FHA to maintain their approval.

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